When the government announced a tightening of National Insurance Contribution rules for LLPs in the Queen’s Speech, there was open discussion about the value to professional services businesses of moving to this corporate structure.

Having reviewed the detail of the proposals, our view is that LLP continues to offer many advantages to firms looking to incentivise members of staff critical to their success while at the same time taking advantage of what continue to be advantageous taxation arrangements.

These benefits were recognised recently by a Brighton-based recruitment company that I helped to restructure to LLP status.

In fact, many professional services business have gone down this route in recent years, including firms of lawyers, accountants (including our own), recruitment consultants, marketing agencies etc.

The benefits can still be significant – and not just for financial reasons.

In short, LLP offers a cross between a partnership and a limited company structure, providing the partners with the benefits of limited liability, ring fencing their personal assets from any potential business creditors.

It is a structure also widely credited with helping firms attract, retain and motivate key individuals, who share both the responsibilities of running the LLP and, ultimately, the profits that it makes.

The basic principles:

  • LLP maintains the tax status of a partnership
  • The structure is suitable for new and existing partnerships
  • The LLP is a corporate body and a separate legal entity distinct from its members
  • It has unlimited capacity and can do anything that an individual can do such as hold property, enter into contracts etc, whereas companies are restricted by their Memorandum of Association.
  • It has no share capital and is not subject to company lawrules governing the maintenance of capital
  • No memorandum or articles of association are required
  • The LLP has complete flexibility with regards to the internal structure it wishes to adopt; there are no requirements for board or general meetings or decision making by resolution

The tax treatment of LLPs is also worth considering in detail.

Unlike company shareholders, members of an LLP are taxed on their share of profits generated by the partnership which, for a higher rate taxpayer, could be 40% or 50%.

Although corporation tax (for a limited company) is lower than the LLP’s income tax rate, any funds taken out will attract an additional tax charge (25% on a dividend extraction froma company for a higher rate taxpayer or an effective 36.11% for an additional rate taxpayer).

In addition, the following Interest Relief, Capital Gains Tax (CGT) and Inheritance Tax (IHT) benefits are available to LLP members, subject to certain conditions being met:

  • Interest relief can be claimed on the loans obtained to purchase a share in the partnership.
  • On any future disposal of a trading partnership (as opposed to an investment business), members may qualify for the lower 10% rate of CGT.
  • In terms of IHT, again trading partnerships have an advantage as the members interest in this should qualify for business property relief, which can effectively eliminate the value of the partnership interest from the deceased’s estate.

In summary, LLP status remains a good route to explore for businesses seeking to retain and incentivise key members of staff while adopting a tax strategy that is beneficial to the corporate body as a whole and the partners involved.